Argentina and the Frog

Like many classic fables, the story of the frog and the scorpion can be traced back to many cultures, each with their own twist. Aesop’s version is here.

A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, “How do I know you won’t sting me?” The scorpion says, “Because if I do, I will die too.”

Argentina was once the rising star of the global economy. By 1913 it was the world’s 10th wealthiest country per capita owing to abundant natural resources and governance that emphasized economic growth. After a military takeover in 1930, Argentina experienced constant political change. From 1930 to 1983, the country averaged a new president every two years. Argentina defaulted on its international debt in 1956, 1989, 2001, and 2014. The 2001 default resulted in a highly publicized battle between Argentina and Elliot Management, a hedge fund that bought huge amounts of Argentine debt at deep discounts. At one point, Elliot Management seized an Argentine Naval vessel (a three-masted tall ship!) moored in Ghana.

Argentina Finds Another Frog

Elliot eventually came to a deal (negotiating a 392% return after the 15 year fight) with Argentina as the country issued a fresh round of debt in April of 2016. After selling $16.5 billion of bonds last year, Argentina sold $2.75 billion of bonds this week that mature in 100 years (100 YEARS!!!) and yield almost 8%.

The frog is satisfied, and they set out, but in midstream,the scorpion stings the frog. The frog feels the onset of paralysis and starts to sink, knowing they both will drown,but has just enough time to gasp “Why?”

Replies the scorpion: “It is my nature…”

Maybe Argentina has their act together and will last longer than 12 years (about the time it would take for investors to make their money back from the yield) before their next default. And maybe this scorpion won’t sting the frog…